Budget Boutique Hospitals? Will The Search for Value Lead to Market-Segmentation in American Healthcare?

Years ago, a professor in a healthcare economics course introduced a healthcare adage: never forget, he said, that the way we pay for healthcare—through insurance premiums– distorts the consumer’s perception of value per dollar in healthcare. He meant that the insured pay into the system over time and are indemnified from sticker shock when it comes to paying the hospital bill. When it comes time to choose healthcare services, nobody (but the insurance company) is looking for any cost accountability.

These days, I’d argue that things are about to change. Over the past year, in an attempt to expose consumers to more accountability for their healthcare decisions, there has been rapid migration of the market to high deductible healthcare plans, employer stipends (for employees to purchase health coverage directly from health insurance exchanges) and higher consumer co-pays.

This has big implications for the evolution of the healthcare industry in America. With increasing consumer attention to value, I think that the industry might now be now primed to customize their offerings to appeal to select market-segments. Some brands will offer high-touch, high-price care. Others will coalesce around offering the basics at a fair price.

The American healthcare industry has not traditionally market-segmented its customers according to value. This would traditionally have been hard to do: cost and outcomes have been always been opaque. Consumers recognize that there are differences in the capabilities of, say, suburban community hospitals and downtown academic powerhouses. Beyond this, most healthcare brands can only distinguish themselves from competitors by offering vague assurances that the “care” is better in their facilities, with their doctors.

This lack of segmentation is at odds with most other industries, which have been laser-focused on segmenting their markets. Marriott Hotels, for example, currently offers 16 hotel brands, and they are becoming increasingly focused on sub-cohorts of consumers. Mariott’s brands range from international luxury hotels to downscale business brands, to stylish boutique brands. Their Bulgari hotel brand “of sophisticated, intimate luxury properties” serves one type of client. Their Moxy Hotel, in contrast, is “designed to capture the rapidly emerging millennial traveler. [T]he new brand combines contemporary stylish design, approachable service and, most importantly, an affordable price”.

Deloitte, in 2012, published interesting work segmenting American healthcare consumers according to healthcare values and found a dramatic rise in what they call the “casual and cautious” segment of the population (the growth of the dark blue pie)

“Casual and cautious” folks are described as having pretty unfavorable views of the existing healthcare system: 70% think that 50% or more of health care spending is wasted (greater than other segments); 17% feel the system gets the best value for money spent (lowest of all segments); and 13% are satisfied with the overall performance of the system (2nd lowest of all segments). Most important, this group had, “strong preference for lower cost plans with smaller networks (69%) vs. larger network plans at higher cost.

Notably, this segment represented the views of 42% of the Millennial generation.

I’d argue that, with the Millennial generation we are seeing an emerging group of dissatisfied healthcare consumers who are prepared to forfeit unlimited access to the costliest doctors, experimental trials and brand-name versus formulary drugs– in exchange for more affordable rates. This is the group that will jump on high-deductible plans.

No healthcare system that I know of has gone out of its way to advertise itself as expert in delivering low-cost, clean and basic healthcare services at a good price. But as cost transparency and consumer financial risk increase, brand segmentation, appealing to a no-frills, strong-basics, value oriented consumer seems like the next evolution. Marriott has clearly caught onto this trend- here is the webpage for their latest Moxy hotel. They are offering consumers “budget boutique”.

The lobby of Marriott’s new Moxy Hotel brand. They appeal to value-conscious members of Generation Y

I’m watching closely to see which healthcare system will have the courage to segment itself and appeal to the value-oriented consumer. My bet: a smaller healthcare system with a tight payer relationship in a hyper-competitive and demographically young healthcare market.

“Managing capitation can be deceiving. Like flying an airliner, the gauges, levers and controls can make it seem like high-stakes science. It is, partly. But as with all things healthcare this is ultimately about humans, their needs and their behaviors. You eventually learn that managing the payment model is as much an art as is the actual practice of medicine”.